It’s an increasingly bifurcated, asymmetrical market, marked by record highs on the Dow and S&P 500 and record low interest rates; an emerging energy boom and stubbornly high unemployment; domestic markets up one minute and emerging markets the next; and on and on it goes.
Yet somehow our 2013 SMA Managers of the Year continue to outperform. How it is done?
“Consistency,” Paul Viera of Earnest Partners, one of this year’s winners, said with a coy smile. Thankfully, Viera and the other winners opened up in one-on-one-interviews with Investment Advisor (videos of those interviews can be found on AdvisorOne.com) at the Envestnet conference in Chicago in early May, where the awards were announced.
So how did our winners not only manage in such an environment, but consistently outperform—as measured by 13 factors—in calendar year 2012? How did we choose the absolute best? Was it all about one-year performance? (No, it was not.) Picking the finalists and eventual winners was a difficult decision that sprung from a well-honed, collaborative process that always kept advisor access and the strategies’ place in client portfolio-building top of mind.
The process begins each year with Envestnet | Prima looking for repeatable, sustainable investing processes in the SMA managers’ strategies. Each strategy must have a clear “alpha thesis” and be available to advisors on multiple platforms to even be considered as candidates for this annual honor. The products must report to the PrimaGuide research application, have at least $200 million in assets and have tenured management of at least three years. Products and managers must rate highly according to Prima’s due diligence process, which uses a proprietary, systematic, multifactor manager evaluation methodology that combines both quantitative and qualitative criteria. There are 13 factors that the Prima analysts consider before recommending the finalists for SMA Managers of the Year, including performance, firm, people, process, style, customer service, tax efficiency and a composite score.
The goal? To identify finalists for each award in four separate categories: U.S. Equity Large-Cap; U.S. Equity Small-, Mid- or SMID-Cap; International or Global Equity; and Fixed Income. The Awards Committee that chooses the winners in each category—and this year, an individual SMA Manager of the Year who stands out among this already stellar crowd—includes Gib Watson, CIMA, the founder and long-term leader of Prima (and now Envestnet vice chairman); Cliff Stanton, CFA, chief research officer of Envestnet | Prima; and two members of the advisor press: myself, editor-in-chief of Investment Advisor, and James J. Green, editorial director of the Investment Advisor Group of Summit Business Media.
The process of choosing the award winners is no casual affair, and the Prima analysts who present multiple managers for consideration in each category must defend their choices to the Awards Committee, using their quantitative skills but also their qualitative knowledge of the managers and their teams and the firms that employ them.
With that, Envestnet | Prima and Summit Business Media are proud to present the 2013 SMA Managers of the Year.
U.S. Equity Large-Cap Award
The first award in U.S. Equity Large-Cap Awards went to Robeco Boston Partners for its BP Large-Cap Value strategy.
“The strategy is an excellent option for investors seeking a relative value large-cap manager, which we believe has identifiable and sustainable competitive advantages as well as a clearly articulated alpha thesis,” Green said in announcing the award.
“We try to find three characteristics to stocks—valuation, fundamentals and momentum,” Robeco Boston Partners’ David Pyle said upon receiving the award. “We found that these characteristics over time lead to outperformance. When we find these characteristics and put a portfolio together, we’ve found that over time that’s what helps us out, really, in any market.”
St. Louis-based Wedgewood Partners took home the second award, a repeat of a win in 2011, for its Large-Cap Focused Growth strategy.
“With respect to the team’s alpha thesis, it seeks to identify stocks that it believes are mispriced in the short term, as investors are often overly concerned with near-term events while this team is focused on the long-term sustainability of growth,” Watson said. “While it’s common amongst long-only active managers, the team does approach the large-cap growth space in a differentiated manner from the vast majority of its competitors.”
Wedgewood’s David Rolfe said “it all comes down to discipline. We’ve just entered the fifth year of a bull market, and different sectors and stocks come in and out of favor. But I’m very proud of the work our team has done in sticking to our philosophy of investing in terrific growth businesses but with the discipline of paying attention to valuation.”
U.S. Equity Small-, Mid- or SMID-Cap Award
Earnest Partners took home the third award for its Mid-Cap Core strategy.
“Unlike most managers, Earnest has built out a very unique investment team, which we believe is the firm’s edge and will be the driver of excess returns,” Green said, quoting Envestnet | Prima’s analysts. “Indeed, instead of hiring personnel with buy- or sell-side investment-related experience, the firm takes a different approach in hiring research analysts who have substantial real-world industry or sector-specific experience.”
“You have to not pay attention to the everyday noise that occurs in the market,” Earnest Partners’ Paul Viera said with the aforementioned grin and still holding his cards close to the vest. “You have to look at businesses that are building something of value brick by brick. In the fullness of time, that smooths out the performance and allows you to get pretty good performance.”
For the fourth award, Boston’s GW&K Investment Management was recognized for the Small-/Mid-Cap Equity Strategy. It was the first of two awards the firm took home this year.
“The alpha thesis of the manager is that a portfolio of high-quality stocks will outperform the index over a full market cycle, where quality is defined as firms with tenured and quality management that are well-positioned with strong products and services in attractive niche markets and have a distinct competitive advantage,” Watson said, referring to Envestnet | Prima’s analysis. “I think what sets us apart from our competition is our long-term view,” manager Dan Miller said. “We feel that it’s the consistency and sustainability of earnings growth over time that really rewards investors. We think other managers are too focused on the short term and too focused on the quarters, and they really just don’t get to know the managers as well as we do.”
International or Global Equity Award
In this category, Thomas White International ADR won the fifth award, which was also was a repeat of 2011.
“The investment universe includes several international companies,” Watson observed. “These stocks are divided into approximately 100 valuation groups that include sectors by regions (e.g., consumer staples in Europe) and by countries (e.g., health care in Japan). In each valuation group, stocks are placed into deciles based on analytical factors that have been identified by the investment team as having significant predictive power based on results from single-factor models and an optimization process.”
“We have a very deep research staff that we depend on heavily,” said Tom White, president and CIO of the firm. “We take their advice up through the ranks. As we’ve been getting deeper and deeper, our performance has only been getting better. Being an international manager with a world emerging market account, we felt it was very important to have an international perspective. More than half of our professionals, as it happens, are from India and from China.”
In a significant achievement, GW&K snagged the second of two wins this year with the trophy in the fixed-income category for the second year in a row, for this year’s sixth award.
“The firm’s Enhanced Core Bond strategy combines top-down analysis to determine the overall sector allocation of the portfolio, and bottom-up fundamental research to select individual securities,” Green said in announcing the award. “The team begins its top-down approach with analysis of present economic conditions, focusing on current and secular inflation trends. This provides the foundation for the team’s view of the business cycle and its longer-term outlook for interest rates. GW&K does not attempt to forecast short-term interest rates; instead, this macro assessment drives the allocation to both investment-grade corporate issues as well as high-yield corporate bonds.”
“One of the things we’re really good at is research,” manager Mary Kane said. “We think of ourselves as value investors, but only on the bond side. We’re always looking for good, relative value opportunities on the corporate bond side. If you go back and look at what created our success over the last few years, we moved to corporate bonds at the exact right time. When spreads on high-grade bonds got to their widest on a historical basis, we moved to our maximum position.”
Overall 2013 SMA Manager of the Year
A new category this year, and the seventh award, was then announced—the overall SMA Manager of the Year, which went to David Rolfe of Wedgewood Partners.
“I wish my mother was here,” he said to laughter. “She’d say she was proud, but not impressed. I humbly thank you on behalf of everyone at Wedgewood.”
The Awards Committee specifically mentioned Envestnet | Prima’s research note in granting Rolfe the honor.
“We believe it is the combination of a highly-concentrated portfolio, a concerted effort to diversify the portfolio by business model, the fact that the stock must trade at compelling valuations, as well as David Rolfe’s deep experience and sole focus on this strategy that gives this team a competitive edge.”
Judging from the track records of this year’s winners, we wouldn’t be surprised if we see them in the competition again next year. Judging by their cool demeanor and steady confidence in what can best be described as a market and economy that needs more stability, neither would they.